I’ve Paid For This Twice Already…

Archive for the ‘guest post’ Category

paidtwice’s note:  When a new site run by a seasoned blogger, ABCs of Investing, approached me about running a guest post for them, I was intrigued.  And the post itself really drew me in.  As an investing newbie who is flying by the seat of her pants, I’ve appreciated the short, informative posts that appear on their site twice a week.  So without further introduction, I hope you find this post as interesting as I did. 

This guest post was written by ABCs of Investing - a brand new site for novice investors which offers two short and quick investing posts per week.  Feel free to subscribe to the feed.

Do you clip coupons to save money?  Do you know the “normal” prices of items on sale?  Do you monitor your spending closely?  Do you know anything about your investment costs?

Investments - they are one of those possessions that people love to ignore.  As long as they have some then everything is ok and no further learning is necessary.  Nothing could be further from the truth!

Retirement investments will usually end up being one of your larger assets and unless you have a good pension, one of your larger income streams.

Don’t ignore one of your largest assets!

Some of you might be thinking “I don’t have any retirement savings because I’m still working on my credit card debt”.  But you will have savings at some point because you aren’t going to be in debt forever.  Once you finish slaying the debt monster, then you should start using that free cash you have and save for retirement.  You don’t have to be doing something in order to learn something about that something!  Most people don’t want to read book after book on investing.  They don’t want to go to a big website and read for hour after hour about investments.  But they have to start somewhere and learning is the key to being a good investor.  An informed investor is a good investor.

If you have already started saving for your retirement then congratulations!  You are already on your way.  However - do you know what kind of asset allocation you have?  Do you know what asset allocation means?  What kind investments do you own?  What are the fees charged on those investments?  What kind of accounts do you have?

You don’t have to be an expert on investments to be an investor but it sure helps to know something about them.  It doesn’t matter if you have an financial advisor you work with - the more you know about investing then the better off you will be.  Financial advisors are in business for their own profit - not yours.  If you have to accept everything they tell you because you don’t know any better then it is time to get started with learning about investing.

I hate investments - I don’t want to learn about them.

Too bad! Nobody cares about your money like you do so it is up to you to learn as much as you can and make sure you aren’t being taken advantage of.  Your partner is the investment guru in your family you say?  Well, what happens if someday your partner isn’t your partner anymore and you have to do all the investing.  Hopefully that will never happen to you, but if it does - wouldn’t it be nice if you had at least a solid knowledge of the investing basics?

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My post Someone Had To Buy The House You Rent, asking how people can own rentals in markets that it is much cheaper to rent in than to buy, garnered tons of reactions in the comments as well as a few around the blogosphere. Mike from Quest For Four Pillars contacted me that evening and asked if he could write a guest post response to my post and I agreed. Here is his take. If you like what you see, consider subscribing the the Quest For Four Pillars feed! For a completely different view from a real estate investor, visit the response post written by Wise Bread’s Catherine Shaffer.

Last week, Paid Twice asked a very good question which I’ve paraphrased as “Why would someone own a rental property if it’s cheaper to rent than buy?” In other words, if you can’t collect enough rent to pay for your expenses (including mortgage) then why wouldn’t you sell the rental house and put the money into something more productive?

I’m not a real estate expert by any means but I do have some ideas about why this situation occurs and why it might not always be as illogical as it seems:

Irrational exuberance for owning property

My theory about this phenomenon is that some house owners are irrational and attach great significance to ‘owning property’ and are willing to take lower returns in return. Real estate by itself is not necessarily more or less profitable than any other kind of investment for a given time period - over the long haul it has gone up by inflation plus 1 or 2% - but many people feel a strong connection with owning property that they don’t feel with any other kind of investment. Conceptually real estate is easier to understand than a stock or a mutual fund so some real estate investors just assume their rental houses are doing well and sometimes don’t do the proper accounting.

Reluctance to let go

The recent decrease in real estate values has meant that people who moved in the last year or so often had to take a loss (or sell for less than they wanted) on their house so many of them decided to rent and “wait it out”. This may or may not work out for the home owner but it indicates that the owner is using their heart and not their mind when making a financial decision. This also increases the supply of rental properties which will lower the rents.

Return on investment - not return on equity

The example of someone who has a paid for house is a perfect example of where the owner might be better off selling the house and investing the money into dividend stocks or reits (like a real estate mutual fund) but they like the idea of owning and renting out a house. Because of the huge run up in real estate prices over the last ten years, there are undoubtedly a lot of owners who have done very well with their investment and are reluctant to let something go which has done so well for them. Logically you need to look at the current value of the house when evaluating the cash flow but a lot of real estate investors will think in terms of what they paid for it - which in some cases is so far out of date that it’s meaningless. ie if someone who paid $150k for a house 10 years ago and is getting $15k in rent per year might think they are doing well because the $15k is 10% of their original house price. Fast forward to today and if the house is now worth $350k then the $15k in rent is only 4% which is not enough to make it worthwhile. On the other hand, if you own a rental house outright - it’s easy to think you are doing well if the revenue is greater than your costs.

Investment time frame

Real estate is a somewhat volatile investment so there are periods where there are significant increases or drops in the house value, but that doesn’t mean the home owner is going to sell just because they are doing poorly for a few years. Rental rates are set by supply and demand - not house price, so if there are too many rentals available in a city, then rents might not keep up with purchase prices. This situation has occurred in some areas over the last several years because interest rates were very low and lending standards were relaxed so in many cases it was cheaper to buy rather than rent so a lot of the potential rental pool became home owners which drove up the house prices and drove down (or kept steady) the rents. A real estate investor has to live through good times and bad if they are in it for the long run.

Houses are illiquid

Selling a house is expensive and can be a lot of work - even in a hot market you are still looking at huge transaction fees of 5% or more which means that you can’t treat a rental house the same way you can treat a mutual fund or stock that you can sell very cheaply with a few clicks.

Selective accounting

Very few home owners (rentals or otherwise) know how much their house costs them. We know what are various bills are and the mortgage and tax payments, but do we add them up over the years? Do we add up the various remodels? Do we consider the potential lost income or capital gains we could have gotten from investing the money in the stock market?

Some considerations which help the rental owner

If there is a mortgage on the property then the portion of the mortgage payment that goes toward equity is not a cost since it is balanced with the increase in equity of the house. Another consideration is tax write offs - the rental owner gets tax write offs for maintenance, repairs, losses etc so that has to be factored in as well. Leverage is another tool which helps the homeowner if the house value rises in the long run. Because they are borrowing a portion of the house price, even a small rise in house value will get a larger return for the investor.

Recent history and complacency

Prior to 2007, real estate values in most of the country had a pretty good run - 10% annual increases or more for at least five years which is way above the long term average. If you were a rental home owner during that time, you were probably too busy celebrating your new found wealth to do any kind of analysis to determine if the income generated by the rental property was high enough to justify ownership of the property.
Remember that with investment properties, you can’t just look at your cost of ownership - you also have to consider the potential income if you put the money into another investment like dividend stocks.

Eventually things revert to the mean

Whether owning a house is a better deal in your area or if rent is the preferable choice, you should keep in mind that over the long run it may not make much difference which you choose as long as you handle your finances properly. Many renters feel like they are going to be left behind because they don’t own a home but there are some steps they can take to make sure that doesn’t happen.

Conclusion

There are many reasons why there are rental houses in areas where it doesn’t seem to make a lot of sense - owners who don’t care, don’t know or are riding it out and hoping the rental market gets better - reasons abound. Remember that if you are considering buying a rental property yourself then do as much research as possible and whatever you do, don’t trust your real estate agent!

Feel free to check out the Quest For Four Pillars blog or click on the big orange icon to subscribe to the feed.

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This is a guest post by Pinyo at Moolanomy, who recently became a daddy for the first time as his wife gave birth to a beautiful baby boy in December. He’s learning the ins and outs of being a father and about reward cards, too! He blogs about personal finance and investing, and I urge you to give his feed a try.

Normally, I am not the one who does household shopping. My parents do most of the food purchases for the household. Although I do buy occasionally, I never bothered to sign up for one of those discount cards offered by supermarkets and convenience drug stores.

The Good

Ever since my wife gave birth, I found myself running to CVS more often. So I figured I would give their ExtraCare Rewards program a try. Well, I was pleasantly surprised. For the very first purchase of some diapers and baby wipes, I saved $5 on a $22 purchase — I will take a 23% discount any day. This is on top of the 2% savings points I am accumulating with CVS, and the 5% cashback reward from my Citi Dividend Platinum Select Card. All in all, I am looking at almost 30% discount on that purchase.

The Not So Good

Just like my friend at Gather Little By Little said, buying generic can save a considerable amount of money, but it could be a hit or miss thing. In general, I found generic store items to be a good way to save some money. So far, the results have been great with generic medicines, mouthwash, and baby wipes. Unfortunately, the CVS diapers I bought weren’t anywhere near as nice as the ones made by Pampers. So my wife made me return the extra package, and I am on a strict order to buy Pampers instead.

The Verdict

I am a believer and will be replacing my lost Pathmark card, and starting to use my Duane Reade card more regularly. I am also going to stick with the generic store brand when I can. As I am writing this, I also noticed a lot of deals on CVS web site that I am going to investigate. If you have look into these saving techniques before, I encourage you to take a look. It’s not much, but little things do add up over time.

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Today’s guest post is from Mrs. Micah: Finance for a Freelance Life. Mrs. Micah is a very frequent commenter here… and every other personal finance blog I have come across it seems. Her youthful and boundless energy is inspiring. Why don’t you check out her feed and see for yourself? Oh, and PS - I’m an overbuyer. You’ll know what I mean (and could have guessed that yourself about me) once you get to the end of the article.

I was first introduced to the concept of over/underbuying by Gretchen Rubin at her Happiness Project blog. I am, without doubt, an underbuyer. This means that I don’t tend to stock up on items I know I’ll need–even if they’re on sale. I’m always looking for a way to spend less. I don’t optimize my shopping.

And overbuyer, on the other hand, might buy 3 beef steaks because they’re on sale–not because she particularly likes beef or will use them in time. Her cabinet is full of soup cans long forgotten (hopefully still good) and bought “just in case.” She shops at Costco, but never seems to save money.

If you don’t immediately recognize yourself, the link goes to a quiz Gretchen designed for identifying your shopping habits.

Like so many things in life, this is a place where we must seek the middle path. The hard part is finding the middle path and convincing ourselves to stay on it!

Here are some ideas for underbuyers to shift towards the middle:

1. Start planning your bulk purchases. If you know that you cook with canned tomatoes every week, consider stocking up when there’s a discount. The tricky part is that sometimes you only find out about the discount at the store. So make decisions beforehand on what you will and won’t “allow” yourself to buy. Consider carrying a list–something like “canned tomatoes, up to 6; acne cream, up to 3; etc.”

2. When calculating your weekly spending afterwards, divide bulk purchases across the month. If you’re like me, you feel really guilty for spending more money than you “needed” to, even if it’ll all even out or save you money later.

3. Consider learning to shop for a couple weeks of groceries at a time. This will help you start to think in terms of bulk. You’ll begin to see big picture and how you can use it to your advantage. I’m not yet able to do this…but it’s something I’m working towards.

And for overbuyers:

1. Make a list. Don’t buy stuff that’s not on the list. And make sure your list is rational while you’re going shopping. Ask yourself “Do I really need this? Will I use it?”

2. Give yourself a flex allowance. I really like how Paid Twice gives herself a wiggle percentage of the overall money spent. That is, she can spend 3% of the total (I believe it’s the total) on impulse buys. You’ve got a little outlet for your natural tendencies–when you see something on the list that you just can’t live without. As long as you stay within your budget!

3. Think more short-term. Remember that goods expire. Work on focusing on the short-term and whether they really will be used up in that time. Perhaps even let yourself feel a little healthy guilt over the idea that they might expire before you used them.

With my suggestions, I focused on grocery shopping, but I think the principles apply to other shopping areas.

Are you an underbuyer or an overbuyer? What are you doing about it?

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This is a guest post from Lynnae at beingfrugal.net who blogs about similar things to what I do - her family’s journey out of credit card and student loan debt. She’s had some setbacks but she perseveres through with her cheerful outlook and plans for the future. Give her feed a try for another family’s debt elimination story!

We’re coming to the end of another year, and it’s a time when people begin to think ahead to their goals and dreams for the next year. Many people make goals related to health and money. And one of the big money goals is always to pay off debt.

There are several mistakes people make when setting goals. The first mistake is to make a goal that’s not measurable. Actually, that’s not even a goal at all. It’s a wish. “I want to make more money” would be an example of this mistake. How much is more? In what time frame do you want to make this money? It’s not specific enough.

Another mistake is setting the bar too low. If your goal is debt reduction, and you can afford to put $100 a month toward debt reduction, don’t make a goal of putting $50 a month toward your debt. If the goal is too easy, you’ll be tempted to skip a month, knowing you can “catch up” next month. But once you skip a month, you’re more likely to never get back on track toward your goal.

The third mistake is setting a goal that is too high. If you can only afford to put $100 a month toward debt reduction, don’t make it a goal to put $200 a month toward your debt. You will quickly become discouraged and give up. Make sure you keep your goals challenging, yet realistic.

The best way to set a goal is to use the SMART format: specific, measurable, achievable, relevant and time-bound. In our example of debt management, a good goal would look like this: In 2008, I will pay $100 to my credit card each month, until it is paid off.

• It’s Specific: $100 every month.
• It’s Measurable: $100 is a fixed amount, not “as much money as I can”. Every month is a fixed time, not “whenever I can afford it”. Until the card is paid off is not forever. It’s a fixed amount of time.
• It’s Achievable: You’ve made your budget. $100 is an amount that will challenge you enough to keep your goal on your mind, but it’s not so challenging that you will be sacrificing food, shelter, and clothing to meet the goal.
• It’s Relevant: Paying money toward your credit card is the essence of paying off debt.
• It’s Time-Bound: You’re paying $100 a month until your credit card is paid off. That is a fixed amount of time, assuming that $100 is more than your minimum payment.

That’s not to say you can never put more money toward your credit card. You may find that just having a goal inspires you to work to meet it even faster. Paidtwice is a great example of this, with the way she snowflakes as much money as she can to pay off her debt each month. But your basic goal should be realistic and measurable.

What are your financial goals next year? I encourage you to write them down. If you have a blog, write them on your blog. Then, if you feel like sharing your goals, make sure you submit them to the Carnival of Financial Goals. The next edition will be held on January 2 at my blog, beingfrugal.net . I’d love to include your goals!

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